Hartnett of BofA urges buying tech bonds with returns at three-decade low

Hartnett draws a contrast between tech credit and tech equities in his call. Bondholders are now earning more to finance the AI expansion, while equity investors are losing the buyback support that drove megacap returns for years. Across the largest companies, credit default swap spreads have widened, indicating that credit markets still view AI as a distinct risk, though Oracle's pullback from its October high suggests some stabilisation might be occurring. For stocks, the Magnificent Seven ETF closed on Friday just under Hartnett's $70 threshold, which serves as an early indicator for his year-end rally thesis. With long-term Treasury yields remaining high and central banks continuing to tighten, the interest-rate environment still represents the largest barrier to a broader recovery in risk appetite.

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Hartnett argues that after a year of heavy AI-related bond issuance, tech debt now appears to be the safer route into the boom, as hyperscalers are beginning to favour creditors over shareholders.

In summary:

• Michael Hartnett of Bank of America advises purchasing US tech bonds, which have dropped around 9% in 2026, making their relative returns versus investment grade the lowest in three decades.
• The primary cause is heavy supply: AI hyperscalers have issued $182 billion in bonds this year, compared with $17 billion in 2024, driving long-dated megacap yields into the 6% to 8% range.
• Hartnett notes that hyperscalers have raised $89 billion via equity issuance and that buybacks have plummeted to an annualised $14 billion, which benefits bondholders.
• According to S&P Global Market Intelligence data as of Friday, five-year credit default swap spreads have risen significantly across major tech firms since September, although Oracle's spread has retreated from its October high.
• Hartnett anticipates relief in the first half of 2027 and states that a year-end rally requires the Magnificent Seven ETF to maintain the $70 level, which it dipped just below on Friday.

Michael Hartnett, chief investment strategist at Bank of America, is urging investors to purchase technology bonds, contending that a borrowing spree by AI hyperscalers has made tech debt attractive at current levels after a difficult year.

In his latest 'Flow Show' note, Hartnett stated that US tech bonds have declined roughly 9% in 2026, putting their total return versus the broader investment-grade index at its lowest in 30 years. Supply has been the primary driver. Hyperscalers have issued $182 billion in bonds this year for data-centre funding, compared with $17 billion in 2024, and investors have demanded higher yields to take on that supply. Long-dated bonds from the Magnificent Seven and other AI companies now offer yields between 6% and 8%, which Hartnett sees as attractive, while CoreWeave's 2031 high-yield bond yields over 14%.

Hartnett argues that the power dynamic is moving in favour of creditors. He cited Meta's recent share sale as evidence that the company is showing more consideration for bondholders, because raising equity instead of adding debt strengthens the balance sheet supporting its bonds. Hyperscalers have raised $89 billion through equity issuance this year, and buybacks have fallen to an annualised $14 billion from $105 billion in 2024. Hartnett stated that the period of large-scale buybacks is finished and that holding onto cash is beneficial for bondholders. He also predicts that the long stretch of AI bonds underperforming AI equities will come to an end.

The pressure from spending is significant. Bank of America forecasts AI capital expenditure will increase to $1.2 trillion by 2027 from $240 billion in 2024, while free cash flow moves from $240 billion to negative $180 billion during that timeframe. Hartnett said that bond markets are now enforcing discipline on the AI growth.

Credit markets have been indicating stress. As of Friday, S&P Global Market Intelligence data showed five-year credit default swap spreads have widened considerably across major tech firms since early September, with Oracle's rising to 276 basis points from 210 and Nvidia's to 129 from 84. Oracle's spread has, however, declined from its October 20 peak of 325, an early indication of stabilisation. In October, S&P Global stated that investors are increasingly viewing AI exposure as a distinct credit risk.

Hartnett expects investors will remain risk-averse until the worldwide rate-hiking cycle concludes, noting that central banks have implemented 42 rate increases over the last six months. He foresees relief in the first half of 2027 coming from geopolitical peace, significantly lower oil prices, and a halt to rate hikes. In the meantime, he said a year-end rally requires the Roundhill Magnificent Seven ETF to hold above $70 and the VanEck Semiconductor ETF to hold above $520. The Magnificent Seven fund closed just below its threshold on Friday, whereas the semiconductor fund remains roughly 8% above its level.